How Does the Deposit in a Secured Card Work?

A secured credit card is a great option for consumers who have poor credit scores or limited credit history and want a chance to improve them. That's because you don't need to have stellar credit to get approved for a secured card, which works just like any other credit card and reports your track record to the credit bureaus.

The main way it's different, though, is that to open a secured card, you must put down a refundable security deposit that determines your card's credit limit.

This deposit works differently than it would with a prepaid card because it's not actually used to make payments for the things you buy with the card. Instead, it serves as collateral to back your credit line. So if your deposit is $1,000, that is the amount of credit you have available to you on your card (also known as your credit limit).

You are still responsible for making monthly payments on your card spending, and you can incur additional fees if you miss payments or interest charges if you only pay the minimum amount due. If you ever default on the card—meaning you have a number of late or missed payments—you could forfeit the deposit. Also, most issuers of secured cards will require a checking account to fund the deposit.

How Do I Make a Deposit?

With most secured cards, you generally have to make your security deposit at the end of the application process. The vast majority of secured cards require that you fill out an application online. There, you are asked for personal information, like your name, address, Social Security number and more.

You are also required to offer financial information about yourself, like your employment status, your annual income, how much you pay for mortgage or rent, and more.

You also have a chance during the application process to decide how much you want your credit limit to be—and in turn, how much money you will submit for your security deposit. Most secured cards will offer the option of picking any number between a range they provide, like $200 to $2000. A few cards might force you to pick a certain amount out of the options they provide, like $250, $500 or $1,000.

"Typically, you apply for a secured card as you would for any other credit card," says John Yardley, chief marketing officer for First Progress, one of the leading secured card providers in the U.S. "But at the end of the application, you provide the security deposit for your card through a debit transaction or electronic transfer from a checking account."

Once you submit the deposit amount you selected at the end of the application process, you are approved for the card, which is then mailed out to you. You can begin using the card right away. It usually comes with all the benefits of any other credit card, including fraud protection that prevents consumers from facing any more than a $50 liability if the card is used without their consent.

Yardley says that because secured cards require a security deposit, it's very rare that an application is not approved.

"There's a 99% approval rate [for First Progress applications]. You will most likely get approved if you are who you say you are—if your Social Security number matches with your name and address," says Yardley. "Identity mismatch is the only significant reason you might get declined. If that happens, we reach out to you to ask for additional documentation. Sometimes, for example, people move or use a different address on their application, and that needs to be verified."

Can You Apply for a Card and Make the Deposit Later?

While the majority of cards will require you to submit the deposit at the end of your online application, there are a few cases in which you have the option to apply for a secured card, receive it in the mail and then submit a deposit to activate it.

The Platinum Elite Mastercard Secured Credit Card, for example, gives consumers this choice. For a $29 fee, users can apply for the card, decide how much they want to deposit and wait to receive the card in the mail. The card is not activated until the bank receives the deposit, however.

"The ability to make the deposit once they have the card in hand satisfies folks who are a little nervous about being approved," says Yardley. "Some consumers might not feel secure at the end of an application. They want to have a card in hand to know that we're for real and they have been approved."

In these cases, consumers receive their cards in the mail. To activate and begin using them, they have to log into their account online and initiate an electronic transfer for the deposit amount from their checking account. Once that deposit is accepted, they can use the credit card.

If, for some reason, a consumer doesn't make the deposit within a certain time period—usually around 100 days—the application for the card is withdrawn.

Can You Change Your Deposit Amount?

Secured cards allow you to increase or decrease your deposit amount—and thus your credit limit—anytime during the period you own the card. For example, say your deposit amount is $1,000, and you want to increase your credit limit to $2,000.

As long as the issuer allows deposits of that amount, you simply have to request an increase from them and submit the additional funds. Conversely, you can also decrease your deposit amount, as long as you haven't charged more than the amount you want to be refunded.

So if you have a deposit amount of $2,000 and you currently have a balance of $1,500 on the card, you can request a credit limit/deposit decrease of up to $500. While doing that may tempt you to spend less, it may impact your credit scores negatively since your credit utilization (the ratio of overall credit you're using compared to your credit limit) will increase.

As long as your card is in good standing, you can request a refund for your security deposit once you are ready to close the account or convert it to an unsecured one. And you don't have to worry about the security of your deposit—reputable issuers will store your deposit in a separate account at another institution that is insured by the FDIC. Confirm that with the issuer when you apply.

Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.

This article was originally published on February 26, 2018, and has been updated.

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